Nordstrom was co-founded in 1901 by a Swedish immigrant who, after working his way from Ellis Island across the country, started a shoe store in Seattle with $13,000 he had earned prospecting for gold in the Yukon. Sound like a Hollywood plot?
A Department Store Legend is Born When John Nordstrom and the other company founder retired, they sold their shares of the business to the next generation of Nordstroms. By 1960 the company, with $12 million in sales, was the largest independent shoe retailer in the country. It soon acquired a women’s clothing retailer, then added men’s and children’s apparel to the product mix, and the modern Nordstrom department store was born. By 1980 there were 31 stores, all in the West, and sales of $400 million. Over the next two and a half decades Nordstrom’s store count would almost quadruple and sales grow fivefold as the retailer expanded into many US regions and launched the Nordstrom Rack outlet division.
Key Strengths Fueling the growth were two key offerings: tremendous merchandise selection and unparalleled customer service. The company has typically carried a large inventory of upscale and luxury apparel and footwear, including shoes in hard-to-find sizes and widths, often twice that of competition. Management’s encouragement of an aggressive commissioned sales force focused on exceeding customer’s needs, and its tendency to promote from within, resulted in a reputation for stellar service. There are countless stories of associates unquestioningly accepting returns, paying shoppers’ parking tickets, and personally delivering product to customers’ homes after hours. Many stores have concierge service, coat checks and pianists who serenade shoppers. Associates are treated well, too: for the past 25 years, Nordstrom has been on Fortune magazine’s list of 100 best Companies to Work For.
Nordstrom Today The company operates 112 full-line Nordstrom stores in 28 states and 59 Nordstrom Rack outlets. Nordstrom family members control a quarter of the stock and occupy a third of the board seats. In addition to the bricks and mortar, Nordstrom owns its credit card business and a rapidly growing Internet division.
Brands Nordstrom has traditionally offered a wider assortment of upscale brands and price points than its more luxurious rivals Saks and Neiman-Marcus, and more upscale and exclusive product than mainstream department stores Macy’s and Dillard’s. As such, it’s considered somewhat of a lower-tier luxury player, a position that has served it well during the past year-and-a half as wealthy consumers, impacted by the negative wealth effect of the deteriorating stock and real estate markets, have traded down.
Recession Reaction Almost a quarter of Nordstrom’s full-line stores are in California, one of the states that felt the recession earliest and hardest. The crisis in California had a devastating effect on Nordstrom’s total business. Same-store sales dropped precipitously beginning in late 2007. This was a bit of a wake-up call for the Seattle-based retailer, who was able to quickly and dramatically cut expenses, inventory and modify merchandising strategy in early 2008.
Like other luxury retailers, Nordstrom has been working with vendors to create exclusive lower-priced second lines to appeal to the “trade down” mentality of many wealthy consumers. With so many people out of work, it’s no longer socially acceptable to engage in conspicuous consumption. The company has also felt the absence of “aspirational” buyers who can no longer afford brands like Prada, Coach or Tory Burch. The sales declines continued throughout 2008 through September of this year Store expansion has slowed dramatically, and management has brought inventories in line with reduced sales.
Recent Financials Last year, annual sales suffered their first decline in the company’s history. Earnings plunged by 44%. After a rocky first two quarters in the current fiscal year, however, profitability has been improving. Third quarter sales rose 3% from last year, and earnings surged by 17%. For the past two months, same-store sales have led the industry. Management feels it is taking market share from luxury competitors by luring customers toward its value proposition. It also feels that its new focus on value without discounting will help it retain its quality image. The Stock currently trades at around 37, or 24 times earnings, a nice recovery from the 52-week low of just over $11 to which it plunged in February.
What’s Next? Management feels it will be at least another year until sales return to the peak levels reached in 2007, and it is doubtful it can do much to make big gains in gross margin given the highly promotional environment. One problem faced by Nordstrom is that many younger customers – the future of apparel retailing – still find the store’s product too conservative and formal. The company must focus on developing innovative, exclusive and appealing product that will expand its customer base without diluting brand equity or quality. It should continue to use technology to cut expenses and reduce inventory without compromising product availability or service. Finally, it should also do everything in its power to retain those elements of exclusivity, including the piano player, that allow Nordstrom to stand out amid a sea of retail sameness. Nordstrom should keep doing what it does best, and better days will come.
